Closing the ‘Opportunity’ Gap

Nevin E. Adams, JD 

There’s no one silver bullet likely to close the nation’s retirement plan coverage gap — but the target is pretty easy to spot.

As it turns out, the nation’s retirement plan access coverage gap is almost exclusively found among small businesses, and it’s not hard to imagine why. The failure rate for small businesses is daunting — and those who’ve managed to avoid that fate are doubtless focused on trying to avoid becoming a statistic. Under those circumstances one can well appreciate that offering benefits, much less RETIREMENT benefits, probably seems like a luxury for another time, if not another business.

A recent issue brief by Anqi Chen and Alicia Munnell of the Center for Retirement Research (CRR) at Boston College examined the issue, and drawing on previous research[1] cited the following three main barriers:

• uncertain revenues that make it hard for a firm to commit to a plan;
• employee preferences for wages and other benefits;[2] and
• the cost associated with establishing and administering a plan (this latter included an assumption by some/many that employer contributions were required).

Indeed, surveys seeking to better understand this reluctance generally find two major obstacles: cost and complexity of administration. And that was before the recent economic downturn. 

Starter Up!

Enter the SECURE 2.0 Act of 2022 which, among its 90-some-odd retirement plan provisions, contains two that are squarely fixed on resolving those issues. The first of these is the so-called Starter K.  Basically, starting now — employers that have never had a plan can set up a “starter” 401(k) or 403(b) plan. There is no required employer contribution, though employees are automatically enrolled at 3% of pay (they can opt out). While this an actual 401(k)/403(b) plan, it looks more like an IRA, more specifically the type that have been established by a number of states. The limits for employee contributions start at $6,000, indexed to inflation — and there is an additional opportunity for a catch-up contribution of $1,000 for those individuals over 50. 

However, unlike the traditional 401(k)/403(b), there is no nondiscrimination or top-heavy testing requirements. 

All in all, it’s a straightforward, simple 401(k) design that removes the complexity (and cost) concerns that have held many small businesses back. Conservative estimates prepared for the American Retirement Association suggest that this could provide 19 million working Americans access to a workplace retirement plan that didn’t have that opportunity previously.

Credits ‘Worthy’

But perhaps the biggest incentive found in SECURE 2.0 is the greatly expanded tax credit for new plans.  Under current law, employers with less than 100 employees that adopt a new retirement plan can qualify for an annual tax credit for up to three years equal to the lesser of (1) 50% of the administrative cost of establishing the plan, or (2) $5,000. But, effective for 2023, SECURE Act 2.0 increases that percentage from 50% to 100% for employers with 50 or fewer employees (it remains at 50% for those with 51-100 employees). So, it covers 100% the cost of operating the plan, up to $5,000 (which, I’m told with some confidence is more than the cost of running those size plans). 

More than that, it also establishes a generous new tax credit for contributions made by small employers to a newly established retirement plan (other than a defined benefit plan) — a tax credit that is a set percentage of the amount contributed by the employer for employees up to a per-employee cap of $1,000 (though contributions to those that make $100,000 or more are not taken into account). Better still, that set percentage is 100% for the year the plan is established AND the following year, 75% for the third year, 50% for the fourth year, 25% for the fifth year (0% thereafter). The full amount of the new tax credit would be available to employers with 50 or fewer employees but phases out for employers with 51 to 100 employees. 

MEP ‘Step’

Oh — and for fans of multiple employer plans (MEPs), the start-up credits are available for three years to employers that join an existing MEP, regardless of how long the plan has been in existence (the MEP rule is retroactively effective for taxable years beginning after Dec. 31, 2019).

The reality is that even today more than 30% of all private-sector American workers still lack access to workplace retirement plans and thus lack an equitable opportunity to achieve a comfortable retirement. Further, nearly 60% of workers in the lowest income classes still lack access to workplace plans. We talk about a “coverage” gap, but it’s really an opportunity gap.     

The challenges confronting small businesses are no less — and arguably even larger now — than they’ve ever been. But, amidst all the economic uncertainty — and with the importance of worker attraction and retention more critical than ever — SECURE 2.0 offers opportunity — not only to strengthen and solidify those workplace bonds — but in the process to help give American workers the opportunity to better prepare for a secure retirement.

Footnotes

[1] Specifically by the Employee Benefit Research Institute (EBRI), the Pew Charitable Trusts, and the Transamerica Institute.

[2] Incredibly, the EBRI research, which admittedly went back to 2003, cited as a primary rationale that employees hadn’t REQUESTED the benefit.